Houston Strategies

Thursday, August 30, 2007

Kotkin on infrastructure investments

The Wall Street Journal opinion page has been featuring Joel Kotkin more frequently lately, the most recent one being on infrastructure underinvestment in American cities, as politicians overfocus on "sexier" investments like stadiums and convention centers (seven-day nonsubscriber link, WSJ permalink, Kotkin site permalink). Some excerpts, including the Houston ones:

Two years ago, as floodwaters overcame the tired defenses of New Orleans, American cities got a wake-up call about the dangers of inadequate infrastructure. But most urban leaders went back to sleep. Since then the occasional disaster, such as the recent bridge collapse in Minneapolis, has been followed by tut-tutting. But if history is a guide, the rhetoric will be followed by another tap of the snooze button.

Rather than deal with the expensive and difficult task of retrofitting the sinews of commerce and communication -- bridges, tunnels, roads, rail lines, ports, sewers, and drainage systems -- America's urban powers focus on the ephemeral and the glitzy. They emphasize not brick and mortar, but sports stadia, convention centers, arts palaces, dubiously effective new light-rail lines, hotels and condo projects....

Instead of returning, many evacuees -- including teachers, businesspeople, health-service workers and the working poor -- appear likely to stay in Atlanta, Houston, or Dallas, where there are prospects for middle-class job-seekers and their families. These cities, particularly the Texas ones, have made significant investments in new roads, airports and waterways.

Lack of broad opportunities was the most-often cited reason by evacuees in Houston for not returning to the place they all consider home. "[Houston] is a place where people go to get ahead," says Crystal Walker, a native of New Orleans and a former student at predominantly African-American Southern University. "New Orleans -- it will always be my first love -- but there are better opportunities here for my kids."

The ultimate question here is that of priorities. Yes, artists and cultural institutions have always been hallmarks of great cities. But underpinning that efflorescence since the earliest times has been critical commitments to such mundane things as water systems, canals, dikes and protective walls -- the economic infrastructure that supports the rest.

...

Although detested by many of today's leading urbanists, the highway system allowed firms and individuals to spread more efficiently into the suburban periphery and into rural areas, creating the modern, dispersed multipolar metropolis. By some estimates, it has also returned more than six dollars in increased productivity for each dollar invested. According to one federal study, it has brought an estimated $1 trillion in producer cost reductions.

...

Nevertheless, few politicians seem interested in a coherent "back to basics" infrastructure investment strategy, except as a potential opportunity for pork-barrel spending. Until they are, we can look forward to more natural disasters, bridge collapses, subway malfunctions and power shortages. What happened in New Orleans two years ago could become not the exception, but the emblem of a troubled American future.

Even in a digital economy, physical infrastructure still counts for a lot - and seems to be something Houston and Texas excel at with the port, airports, highways, and a strong electrical grid (remember the California blackouts?).

Monday, August 27, 2007

What really preserves a neighborhood's character?

I went to a workshop tonight put on by the City of Houston Planning Department on tools to protect neighborhoods, with a focus on deed restrictions. There was a lot of good material, but the most interesting to me was an impromptu debate that occurred during Q&A with Marlene Gafrick, the Planning Dept Director.

Over the next couple of weeks, city council will consider closing the "condo loophole" on the minimum lot size restrictions - where developers avoid minimum lot size restrictions by essentially building a mini condo complex on the land instead of townhomes owning micro-lots. The new ordinance will only allow a single-family home on the lot (which sounds dangerously close to zoning to me). In general, the city seems intent on reigning in the amazing townhome development happening inside the loop. But one man pointed out that townhomes make housing more affordable, which received a negative reaction from the crowd.

People seem to believe it will preserve the character of their neighborhood to require only one single-family home on a minimal size lot. But does it really? These restrictions already apply in West U and Bellaire. The result? Waves of gigantic McMansions. I think they're perfectly nice, but they certainly don't match the character of the older single-story ranch houses in these cities.

But it's not just the physical character that changes. If a developer can't build three $200K+ townhomes on a lot, he'll be forced by economics to build a single $600K+ McMansion. The demographic that can afford that house are in a completely different income bracket from those who can afford the townhomes. Does that really preserve the neighborhood's true character better than the townhomes? A middle class neighborhood ends up rapidly gentrifying, when townhomes could have let it stay middle class.

Right now Houston is attracting a wonderful demographic mix - racially, economically, and age wise - to the townhomes inside the loop. That's part of why the inner loop feels so vibrant today. Do we really want to replace that with only wealthy older couples and families? That's what's happened in Bellaire with the single-family housing restrictions, and that seems to be the direction Houston's headed.

I'm not saying there aren't improvements that could made to protect our neighborhoods and improve deed restrictions, but I'd like to see more debate and awareness of the potential downsides of starting a war against townhomes.

Thursday, August 23, 2007

Forbes flubs Houston commute costs + misc

Several people have passed along the recent Forbes article proclaiming Houston the most expensive city in the country for commuting. Forbes is usually on the ball, but for some reason they let the Surface Transportation Policy Partnership (STPP), a nonprofit research firm with a very anti-car agenda, do their ranking - a group I've criticized before for the flaws in their approach.

They note that Houstonians spend 20.9% of their annual household costs on getting to work. From that data point they make the leap that Houston is an expensive city to get around in. The problem is that a lot of those costs are completely voluntary. What do people do when they have a good income and cheap house? They buy a nice new SUV, truck, or luxury car to drive around in. These vehicles have high depreciation and fuel costs. But they chose to buy that vehicle for their commute and pay those costs. They could have just as easily bought a Honda Civic, Toyota Prius, or similar vehicle and cut their costs in half or more.

Here's an analogy: if a survey shows people living in River Oaks have expensive clothes, does that mean it's expensive to buy clothing if you live in River Oaks? Of course not. River Oaks people can buy their clothes from Target just like anyone else if they want to, but they choose to go out and buy expensive clothes instead.

One test I like to apply to these proliferating city rankings is this: is there something stupid or absurd the city could do to improve its ranking? If so, that's a sign of a bad ranking framework. In this case, if Houston adopted policies to drive up housing prices (or really increase any other household costs), hitting people's incomes and forcing them to cut back and buy cheaper cars, our commute-cost ranking would improve. Bad action -> good ranking = bad system.

On the plus side, they at least note that when it comes to combined income spent on housing and transportation, we drop dramatically to #14 because our housing is so affordable.

Moving on to an excerpt on transit:

The study also found a very high correlation between cities that had extensive train systems and those in which households spent the least on transportation costs. Four of the five cheapest commutes were rated as having large or extensive rail systems...

It's important to understand, though, that the least costly commutes tend to be accompanied by high housing costs. New York and San Francisco were among the cheapest in the country, at two and seven respectively and have some of the highest housing expenses and least affordable housing markets in the nation.

Of course, when calculating the "cost of commuting" for those cities, they're ignoring the taxes that people pay to subsidize the transit system. Not surprisingly, if you can get the government to pay 60-80% of the cost of your transit commute, your out-of-pocket cost looks pretty cheap.

UPDATE: The Antiplanner picks up the story too, and gets a response from the Forbes author.

Moving on, a few minor items to finish out the week:

A national story on urban infill development, with a profile the Houston Pavilions project downtown (scroll down to the middle).

For all the Houston techies and entrepreneurs out there, consider attending the BarCamp Houston "unconference" this Saturday at the Houston Technology Center. Related to my company OpenTeams, I'm planning on presenting on "How the Houston tech community can collaboratively build the next breakout Web 2.0 company." Hope to see you there.

Monday, August 20, 2007

Why city growth and size matters

Houston is lucky in that we still have a generally positive attitude towards growth, although I see that attitude weakening every year as the burdens mount on our transportation, health care, and education systems (among others). Many cities on the east and west coasts are strongly in the anti-growth camp at this point, which is why it's good to remind people from time to time why growth is good, and worth the hassles it brings.

Excerpting from an excerpt of a study by the Santa Fe Institute, famous for their modeling of complex systems:

Cities have an almost magical ability, spurred by increased human interaction, to stimulate innovation and increase wealth....In other words, if the number of city denizens doubles, these factors—both negative (crime) and positive (wealth creation, total wages and gross domestic product)—will more than double....As cities get larger, they create more wealth, and they are more innovative at a faster rate....What was surprising to the team was that the creative output (jobs, wealth generated and innovation), as cities grow, becomes faster and faster per capita.

The problem is that these benefits of growth are hidden, while the costs are directly in our face on a daily basis, making it all the more important for government officials and others to keep reminding citizens of the gains, as well as convince voters to pay for the infrastructure necessary to support it.

As I finished writing this post, it felt a little familiar, and a little research uncovered that I already wrote about it in February, where I actually gave a longer excerpt and went into more depth on the implications (which sparked quite a stream of comments). My tip came from the Creative Class blog in both instances, so it looks like they also posted on it twice. Oh well, as they say in advertising: repeat, repeat, repeat to get your message across...

Saturday, August 18, 2007

Ride transit for better hurricane preparedness?

Just wanted to pass along this email from a reader. The Hurricane Dean track forecasts from Drudge seem to indicate we're pretty safe for now, but better safe than sorry. Maybe a good opportunity to try out our extensive express HOV bus options for your commute?

Dear Mr. Gattis,

I wanted to let you know something about what's happening up here in Spring, Texas as a result of the threat of Hurricane Dean. I'm writing to you at 5:00 p.m., Saturday, 8/18/2007. Please be advised that Gasoline stations are already beginning to run short of fuel. My daughter who just left for Kerville for colllege tells me that some stations on FM 2920 are already out of fuel. As well, there has already been a run on the local Grocery stores and our Kroger is out of bottled water.

Based upon our experience during Hurricane Rita, this situation will only worsen during the coming week. Spring/Klein, as your well aware, are far enough north of the Gulf to be mostly safe during a Hurricane and many of us will not be subject to evacuation. However, the shortages will play havoc with gas supplies, water and hurricane preparedness materials and just getting to work this coming week could stretch our dwindling resources.

As a service to your readers and my neighbors, I wanted to remind everyone that as supplies tighten, they might want to consider transportation alternatives for the comming week, if for nothing else but to save gas.

For those living in the general Spring/Klein area, the 204 Park and Ride offers regular service between Spring and Downtown. Those living on the west side of I-45 will find the Kuykendal Park n' Ride convenient and for Humble/Kingwood riders, there is the Townsend Park n'ride. All three locations have buses leaving at 6:00 a.m. Also, the Kuykendahl Park n' ride has the 283 bus which goes to the Galeria area. For those living closer to the Spring Park n' Ride who need to get to places in West Houston, they can transfer to numerous buses from Downtown that go to the Galeria, the Medical Center and points west. For more information, you might want to direct readers to http://www.ridemetro.org/Schedules_and_Maps/system_maps.asp;

I mention this because saving gas and keeping our vehicles safe for the next few days might be very critical. I would add that I know from reading your blog that safety has become a concern of late. All of the Park n' Rides have Metro police watching the lots; Spring and Kuykendahl are limited access and are regularly patroled. As for ticket information, you might want to double check my information, but it used to be the case that people could buy tickets at local Kroger stores. Also, many local employers sell bus passes at a discount so people might want to check with their employers.

In Houston, not only is employment in the energy industry up, there's also a growing manufacturing sector and an expanding port complex, which together have contributed to a more than 10% increase in jobs over the past three years. "Everything's now hitting on all cylinders," suggests Bill Gilmer, a Houston-based economist from the Federal Reserve Bank of Dallas. He adds that other parts of Texas — Dallas, Midland-Odessa, Corpus Christi — are also experiencing rapid growth, particularly in exploration and oil services. While engineers and geologists are at or near the top of the food chain, manufacturing compensation averages $80,000 — $20,000 more than in information and financial services, and more than three times that in retail.

Broad-based growth of this kind in the manufacturing and allied sectors is intimately tied to infrastructure. Houston has recently completed a major expansion of its port, with an investment of $2 billion. Its airport is undergoing a $3.1 billion upgrade, and an additional $65 billion in road and transit projects are being planned for completion by 2025. Such infrastructure investment should be regarded as critical to a regional economy, as Minneapolis is no doubt learning now.

For months I've been meaning to write about an impressive paper from the Kennedy School of Government, "The Impacts of Commuter Rail in Greater Boston." It's based on a longer paper by Eric Beaton that was awarded the Howard T. Fischer Prize in Geographical Information Science, for the best use of GIS by a Harvard graduate student. In his research Beaton used GIS to analyze the relationship between rail transit station location and transit use. He found that "In the late 19th and early 20th centuries, commuter rail service played a major role in shaping the land uses in the communities it served. But that does not seem to be the case today. . . . Looking to the future, this means that providing new commuter rail facilities is not likely to produce significant changes in travel and land use patterns." (www.ksg.harvard.edu/rappaport/downloads/policybriefs/commuter_rail.pdf)

I held off writing about this paper because I despaired of its being able to persuade those not already convinced that rail transit has only very limited potential. So many elected officials, in particular, seem to have concluded that getting people out of their cars is (only) possible with snazzy new rail transit, so we must forge ahead, despite the enormous cost and very modest results in most cases. This seems to have become more of a belief than a reasoned conclusion. And against a belief system, what good is evidence?

But last week I read a commentary that provided one of those "Aha!" moments. Stephen Fleming, chief commercialization officer at Georgia Tech, wrote it for the Georgia Public Policy Foundation. Fleming uses the power of analogy, explaining the historic development of telecommunications on the basis of switched circuits. In "legacy" telecom systems, all the way through the failed ISDN of a decade ago, a voice or data message required its own, exclusive pair of copper wires, from origin to destination, with numerous switching steps along the way. But then a few pioneers invented packet switching, in which a voice or data message is broken up into individual data packets, with each one routed independently to its destination, making use (simultaneously with zillions of others' packets) of the entire network of possible connecting paths. Packet switching is what made the Internet possible: it's faster, more flexible, and ultimately much cheaper than circuit switching, though it requires lots of processing power.

As Fleming goes on to write, "The analogy is obvious: Mass transit systems are circuits. Automobiles are packets. Packet switching always beats circuit switching." He goes on to explain that mass transit means capital-intensive routes with minimal flexibility. But with automobiles, every "packet" goes into a large network to be routed direct to its destination. Especially when those destinations are door-to-door-to-door-to-door, as in so many people's trip-chaining commutes. (You can read Fleming's complete commentary at www.gppf.org.)

On second thought, perhaps this analogy is too abstract for non-techie elected officials. But it should be persuasive to the business leaders who end up on task forces devoted to solving urban transportation problems. Just remember: packets beat circuits.

Monday, August 13, 2007

More on a SWSX/ETC for Houston

I'm back from SoCal for my brother's wedding, and I have a new appreciation for what people mean when they say "LA traffic." It's a whole 'nother level well beyond anything you find in Houston. Traffic that *creeps* along at less than 10mph for miles on end. Really painful, hair-pulling stuff. And their HOV diamond lanes are worthless, as far as I can tell, because they're almost always as slow as the main lanes - they're just a sorting mechanism that puts all the cars with 2 or more people in the left lane. The weekends seem as bad as the weekdays. An eight-lane freeway to San Diego is already running full at 8:30am on a Saturday. And don't even try to imagine how bad it is by the afternoon - both directions. I can't fathom how the people who live there stand it.

Continuing my post from a couple weeks ago on establishing a major Energy Technology Conference in Houston - this is from an email exchange, responding to an option of targeting various renewable conferences:

For what it's worth, I would argue that the goal should be to establish *the* largest, signature, flagship conference on energy technology in the world, broadly covering both renewables and traditional sources. It should be the one that attracts the broader generalist media - not just the niche industry media. As an example, there are lots of auto shows, but the Detroit one is where the major announcements and product unveilings are made, and both the industry and general media give it strong coverage. There are lots of film festivals, but all the buzz is around Sundance and Cannes. Comdex in Vegas used to be that show for technology (and they would *fill* the city with it, booking almost all available hotel rooms - it was the "must attend" event for everyone in tech). Austin's SXSW has become that level of show in music and creative media.

Sure, different sub-industries and specialists will tend to stick to their parts of the show, but we want generalists to find it interesting and be able to see an overview of all the technology developments going on in the broad area of energy. These shows tend to be so large, visitors can't possibly see everything even if they want to - but that's ok: they have to pick and choose, or, better yet, bring a team with them to cover everything. Ideally it requires both Reliant *and* the GRB. We want to be the kind of event where every substantial media organization feels they need a reporter filing "News from the annual Energy Technology Expo in Houston" - the NY Times, Wall Street Journal, Time, Newsweek, Fortune, Forbes, CNN and the other news networks just to name a few. That's the kind of buzz you can't buy.

Somebody will establish this kind of signature annual event in energy technology. I just hope it's us instead of California, Colorado, Austin, or elsewhere.

Wednesday, August 08, 2007

I'm heading to Orange County, CA for my brother's wedding until Monday, so no posts for a few days. In the meantime, here is a long post of misc smaller items with a lot of links to keep you busy for a while:

Google maps has added parts of Houston to it's new street views service. Go there, go to Houston, and then click the Street View button to see the roads in blue that have them. Pretty cool. Surprisingly, it even has some pretty good chunks of Galveston, although not much of the seawall, for some odd reason. Google obviously thinks highly of Houston, since we're one of the first 9 cities to get street views, before Chicago, Seattle, Boston, DC, Austin, or Dallas.

"Houston has 501 public companies and 915 public and private energy firms. The New Orleans region has just 11 public companies, and the local energy sector comprises 45 public and private firms, according to an analysis by the energy-focused investment firm Howard Weil. That mass of companies makes it difficult for an oil and gas company to do business anywhere but Houston...."We make it about New Orleans, but it's not really about New Orleans. It's about Houston," said Jeff Parker, president of Howard Weil, which is based in New Orleans. "Houston is the Mecca of the oil business. It is strategically the most important city in the U.S., and probably around the world, as far as the energy business is concerned."...Houston had an edge on New Orleans because it had a more business-friendly environment and a better public school system. "Houston was just a better market to operate and live," Bennett said.

...a combination of factors makes Houston the hub that it is.

"How do you define vibrant? You just feel it, you sense it," Bennett said.

In Houston, energy is "the thing," said Al Petrie, a New Orleans energy consultant. "It's the heart of the city." About half the city's 2.2 million jobs are related to the energy industry.

Many executives talk about the "deal flow" in Houston, where prospects are traded at lunch and customers are picked up during casual conversations. Briggs, of the oil and gas association, likens it to the financial activity and camaraderie of Wall Street.

...Houston continues to grow just because other companies are there, Bennett said.

"It's feeding on itself," he said. "It's kind of like a good college football team that is consistently good. As long as you have a good honest program, recruits just walk in the door. The same thing happens in Houston; it attracts the best talent."

An interesting stat on preferences in a Sydney op-ed about their overpriced housing from government development restrictions (thanks to Hugh for the link).

"Making more cheap land available on the fringes would also relieve the pressure for people to live in flats. Research by Patrick Troy of the Australian National University shows 85 per cent of people living in flats would rather live in freestanding homes. So they are denied the lifestyle that Australians have traditionally had, and which most of us ought still have an opportunity to enjoy."

Reinforces that the desire for high-density living is a niche lifestyle, and nowhere near a majority (as I've heard claimed from time to time). Note that that 85% is of people already living in flats, not of the entire population - so the true single-family home preference percentage would be much higher once you add in everyone already living in a detached home - and, conversely, the overall percentage of the population who want to live in dense flats is far less than 15%.

Randal O'Toole on why it costs so much more to build a house in California vs. Texas (specifically San Jose vs. Dallas). It's not just the land, but permitting, labor, and impact fees. Check it out for the break down.

Christof has an excellent post on when commuter rail makes sense, and when it doesn't (such as in Houston, for the most part). I do have one minor quibble: "Caltrain stands out. It’s been around for a long time, too, but it’s experienced dramatic ridership growth in recent years: 18,000 in 1985, 32,800 today." 2.8% annual growth over 22 years doesn't seem very dramatic to me, but quite modest, especially when compared to the overall growth in Silicon Valley since 1985. Remember, we're talking about a time span between the first and second golden ages of Steve Jobs and Apple here... and that's a very long time in tech years.

One of the factors I don't discuss much in why people choose cars over transit is safety, specifically from crime. I've always thought the crime argument was a bit overblown, and that transit was perfectly safe. As a large, tall male, personal safety is not something I think about much. But then I come across this freakishly scary headline/stat on Drudge that makes me rethink my whole notion of transit safety, especially since my oldest stepdaughter is interning in New York this summer. In fact, she called me on one recent night a little shaken up, because a man had been shot in the face at her Brooklyn subway stop right before she arrived.

60% of riders say sexually harassed on NY City subways..."...asked commuters how often someone sexually attacked or harassed them in the subway, and found frightening results. More than 60 percent of those who responded to the online study said they were sexually harassed and 10 percent said they'd been sexually assaulted."

"This whole notion of what happens underground stays underground is just not acceptable anymore," Stringer said. "Instead of fighting back, people have become afraid or believe that nothing can be done."

Rush hour was particularly perilous for harassment and attacks, according to Stringer's survey of more than 2,000 people. Almost all victims did not report the crime to police or Metropolitan Transportation Authority personnel.

A good blog post on the purpose of cities, which supports some of the themes in Opportunity Urbanism.

The Economist on rising problems in Phoenix, which I consider one of Houston's major high-growth competitor cities. It should serve as a warning to us not to take our eye off the basics of congestion relief, crime, and education.

In the category of "transit is better in theory for others than in reality for yourself" department, an amusing expose by the NY Times on billionaire Mayor Bloomberg's supposed transit commute to work:

He is public transportation’s loudest cheerleader, boasting that he takes the subway “virtually every day.” He has told residents who complain about overcrowded trains to “get real” and he constantly encourages New Yorkers to follow his environmentally friendly example.

On mornings that he takes the subway from home, Mr. Bloomberg is picked up at his Upper East Side town house by a pair of king-size Chevrolet Suburbans. The mayor is driven 22 blocks to the subway station at 59th Street and Lexington Avenue, where he can board an express train to City Hall. His drivers zip past his neighborhood station, a local subway stop a five-minute walk away.

That means Mr. Bloomberg — whose much-discussed subway rides have become an indelible component of his public image — spends a quarter of his ostensibly subterranean commute in an S.U.V....

Being driven to the 59th Street station shaves about a third off the mayor’s commuting time, based on a reporter’s test runs. It also saves him aggravations others cannot avoid, like taking the local and transferring to the express.

...Mr. Bloomberg’s use of the subway to get to work appears to have declined over time. In January 2002, he reported taking the train all but one day of his first three weeks. Nowadays, it appears, the S.U.V. is his primary mode of transportation. Based on the reporters’ observations, the mayor took the subway to work about twice a week.

Some great stats on Houston's boom from the latest Greater Houston Partnership report:

"August Trivium — Ten years ago, in ’97, the value of building permits issued by the City of Houston in the entire year was $2.42 billion. This year, the value of building permits issued by the City of Houston in the first half of the year was $2.88 billion."

Reason response on private toll roads

Tory's July 30th post on public vs. private provision of toll roads obviously generated a great deal of interest and discussion among his readers. As a policy analyst at Reason Foundation, it's been my experience that there's a great deal of complexity and misunderstanding regarding public-private partnerships in transportation, several of which were raised in Tory’s post and subsequent comments. Given that, I'd like to clarify a few issues that arose in the discussion.

Non-compete clauses: Non-compete clauses are often trotted out as an argument against private toll facilities. Opponents like to refer to the SR 91 express lanes in Orange County as the prime example of why non-compete clauses are a “bad” thing, but the reality is that non-compete/competing facilities agreements have evolved a lot since those days (for reference, see my colleague Bob Poole’s analysis of the SR 91 here). Today's "competing facilities" provisions strike a better balance between the public and private interests. They rarely, if ever, ban all "free" road additions near the toll road; instead, they usually provide for compensation for reduced traffic, rather than forbidding public-sector roadway additions.

Let's look at the SH-121 project in Dallas, for example. The CDA agreement TXDOT originally negotiated with the Cintra/JPMorgan team (of course, intervening political factors make it likely that this project will be transferred to NTTA) defined a "competing facilities zone" on either side of the toll road. Certain additions of non-tolled highway capacity within this zone would be subject to compensation, but only if the private concessionaires could demonstrate reduced traffic and revenue from those new roads.

More importantly, excluded from compensation would have been all portions of major freeways, all limited-access highway lanes, and all projects in state and regional transportation and mobility plans.

A few key points:

The concessionaires would have no right to prohibit any future road development.

Their only remedy would be compensation, and that's only if they could prove a loss of revenue.

That remedy only applies to a narrow category of road projects other than major planned projects.

As a counterbalance, the agreement would have given TxDOT the right to extra toll revenues due to any positive traffic impacts on the toll road from TxDOT road improvements.

There are similar provisions in the concession agreement for SH-130 segments 5 & 6, which will extend the SH-130 toll road south of Austin towards San Antonio. Not only does this agreement exempt from compensation all upgrades and capacity increases planned in the state transportation improvement plan, the state's mobility program, and the Austin and San Antonio-Bexar regional transportation plans, but any effects of I-35 expansion are also non-compensable. (for more on this, see my colleague Peter Samuel's post on TollRoadsNews.com here)

Some critics, such as State Senator Robert Nichols, have complained that a 50+ year toll concession would extend farther into the future than typical metro area long-range transportation plans. While this is true, it's likely to have little practical impact. Let's look again at the SH-121 project. The reality is that by 2030, the area near the toll road will be so built out as to make it extremely costly for anyone—-be they public or private entities-—to add new highways beyond those already planned. It’s also useful to look to the example of the land near the Chicago Skyway, which the Mayor Daley leased for 99 years. The concession agreement in that case includes no protections from competition at all because the area is so heavily developed that it makes new roadways extremely unlikely. It's even been rumored that the Indiana Toll Road concession originally did not include a competing facilities provision, but that (a very limited) one was added at the request of some elected officials, not the concessionaires.

It's certainly possible that changing circumstances will require revisions to a 50+ year concession agreement, which is why they all include detailed provisions to allow changes during their term. They have detailed provisions for negotiating/arbitrating disputes and employing independent third parties to make fair financial estimates.

It's also important to remember that the state is certainly free to negotiate concession agreements that have little or no protections from competition. But the trade-off is that it would further increase the toll road company’s risk, and would presumably decrease the amount of revenue it could commit to sharing with the public sector.

Toll increases & profits: Many opponents of toll concessions point to fears that profit-maximizing firms would raise tolls to sky high levels. This is one of the most specious arguments out there. The reality is that the concession agreements negotiated to date (Indiana Toll Road, Chi Skyway, SH-130 segs 5&6, for example) include strict maximum caps on annual toll increases, typically indexing them to some measure of inflation (CPI, etc.). The agreement for the SH-121 concession even would have included a far-below-inflation cap if actual inflation levels would have risen above a certain level. Further, the actual toll rate chosen by the concessionaire may not actually reach the maximum allowed under the cap. It may indeed be the case that a lower-than-max rate would be the rate that would maximize customer usage & revenues.

Regarding profits, governments can always limit the rate of return a concessionaire is allowed to make, with surplus revenues going into a state transportation fund. California’s original pilot program for long-term concessions used this approach, as have the concession agreements here in Texas.

Costs of capital & discount rates: When comparing money flows over time, it's standard practice to use some form of interest rate to discount future flows to present value. For investors contemplating an investment, a key issue is the value of the resulting cash flows over time. From the investor's standpoint, the discount rate used reflects the level of risk associated with future cash flows. The nature of the investment will determine the appropriate rate to use, and for a toll road project, a government entity should be given a higher discount rate than a private concessionaire for reasons discussed below.

Now some observers have noted that private companies have an inherently higher cost of capital than a public authority with access to tax exempt bond funding; hence, the public sector would build a road cheaper. I'd argue that this line of thinking misses an important point. As the ultimate beneficiary representing the public, the "investor" in the case of a toll road is some government entity, say TxDOT. It has a choice between two "investments": either a private concessionaire or a public sector toll authority (like HCTRA or NTTA). From the investor's perspective (i.e., government perspective), the internal costs of capital (public vs. private) are of little concern. They're interested in the annual payment--the bottom line, so to speak. Once a private concession is signed, the annual lease payment is almost certain. It has the same priority for payment as operating and maintenance costs, and, as per the contract, must be paid before debt service, taxes, or dividends to shareholders.

But for a public toll authority like NTTA or HCTRA, future payments to the state would come only after the payment of operating costs, debt service, etc.--and only if there is money left over. A reasonable investor would be more skeptical about the value of these future payments than a private proposal, and would assign a higher discount rate to the public authority. This was a point made repeatedly by TxDOT and PriceWaterhouseCoopers' analysts regarding the risks associated with turning the SH-121 project over to the NTTA.

Add into that the conservative tax-exempt bond markets vs. private capital markets that absorb more risk. Private entities doing project-specific financing for new road projects can raise more significantly more capital than a public toll authority. Public toll authorities generally don't do project-specific financing--they have to basically leverage their entire systems to do new projects (like NTTA will do with SH-121, if they ultimately reach agreement with the RTC & TTC), with the inevitable downgrades from ratings agencies. So at some point, after leveraging up their systems repeatedly to take on new projects, they are likely to become overleveraged and increasingly find it more difficult to take on new projects.

This is a critical point, since one of the implicit goals of SB792 was to get the local and regional toll authorities like NTTA and HCTRA to take the hundreds of millions of dollars in the bank they're sitting on and invest those funds into the many new projects needed to reduce congestion and improve mobility in Texas' metro areas. The new market valuation process established under SB 792 is precisely designed to do this (see a summary of the process here--warning, large PDF).

Another interesting aspect of SB 792 is that local and regional toll authorities now have the power to do concessions (if they're reauthorized during the next session), just as TxDOT and Regional Mobility Authorities have had. Florida's toll authorities also recently got the same powers, as did a few in Virginia. So we may see more of even the public toll authorities turn to concessions to get new roads built and avoid the inherent limitations of government financing.

Lastly, it's also important to remember that the feds have established some vehicles-—TIFIA credits and Private Activity Bonds, for example-—to make tax-exempt funding available for a portion of the costs of new facilities done through public-private partnerships.

Thanks much to Tory for facilitating the discussion. I'd like to point readers to a few of Reason pieces that will help to shed more light on these and other issues surrounding public-private partnerships:

Sunday, August 05, 2007

Transit vs. cars in NYC

Someone anonymously left an excellent pair of comments about NYC mobility on one of my Reason posts on why mobility matters to personal life from a couple weeks ago. It's so good I decided it deserved its own full-blown post for those who don't track comments (the substantial majority, I'm sure). It matches what I heard from my oldest stepdaughter, who just got back from a summer internship up there. She enjoyed the experience overall, but pointed out that most young people have been priced out of Manhattan for Brooklyn (where she lived), and getting around Brooklyn on transit is far harder since all the trains focus on going to Manhattan (and taxis are generally not available for hailing). Visiting friends or meeting up even just a mile or two away in Brooklyn can be quite the trek, evidently.

On to the comments:

"I live in the New York area. There has been no road capacity additions here of any consequence in 40 years and nothing is planned. Any propsal to increase capacity is shouted down as if it were a plot to store plutonium in childrens lunchboxes. Any plan that manages to accrue public support is litigated to death, which seems a rigged game of self-described environmental zealots engaging in a pre-determined conversation with their friends in the judiciary. The result is not a transit paradise -- the fact is that a transit ride to work in NYC is an exercise in living like a canned sardine for the duration of one's commute. Rather, we are enduring a little bit (or a lot) of misery every time we try to get somewhere. The NYC area is, beyond Manhattan, as dispersed as any in America. I have relatives in various suburbs of New York, and it is an exercise in frustration and wasted travel time to visit them. What public policy interest is served by keeping family members living apart separated by traffic is beyond my understanding. The leadership in this area has been conditioned into thinking car = bad, and the author of this blog is dead-on that this sentiment, drilled into our heads by the media and academic elites, is 180 degrees false.

The first thing a person does upon entering the middle class is acquire a car. It's true in China, in Europe and in Queens. The way in which a person wants to live his life requires a car whether transit is an alternative for some trips or not. I cannot take my three kids grocery shopping, then take the groceries with my kids while I drop off one child at a friend's house, and then unload my groceries, hit an ATM machine, pick up my dry-cleaning, head over to a friend's house, then pick up the child I dropped off earlier to take the four of us to a movie, all using transit. This is called "task bunching", and a car renders this possible. Trying to do 25% of what you can do with a car using a bus system and fixed rail -- no matter how comprehensive -- is simply impossible. Transit devotees should take a trip to Queens or Brooklyn and count how many people on a train or bus are actually (1) carrying something or (2) traveling with their children. Answer: not many (and their fellow passengers are grateful). The fact is that people in Queens and Brooklyn do grocery shop and travel with kids, and they generally do so by car. To give you guys in Houston an idea of what running errands on mass transit is like: it requires all the planning and patience currently required to travel by commercial aircraft, all to take your three kids to get lunch. It's about that much fun.

What we are devolving to in NYC is a situation where mobility is being reserved for the wealthy and connected, and mobility degrades over time for the rest of us. Transit has a definite place on a very high-density corridor, but it simply cannot serve as an all-purpose mobility solution. We need constant substantial road investment.

and then continued:Transit makes sense for trips along a dense corridor terminating at a dense end point. It makes perfect sense that one would prefer transit, for example, from commuting at peak hours into midtown Manhattan from a spot along the mainline rail corridor in NJ. In fact, the density of Manhattan could not exist without fixed rail transit. That same system is virtually useless, however, for every other activity, apart from commuting, undertaken by the people who use it for commuting. The typical suburban rider uses the LIRR or NJ Transit exactly 10 times per week, to get to an from work, and then not at all. Note that these suburban commuters consist of a minority of those in their communities who commute to the dense end point, and not to dispersed suburban jobs, which is where the job growth has been in the NYC area since the 1950s. NYC historically had twice as many jobs as the entire state of NJ. Today that ratio is exactly reversed. I count myself a proponent of transit, but as a piece with vastly improved overall mobility, anchored by improved automobile capacity. It is extremely frustrated to watch road projects scuttled in suburban CT and NJ with the elitist trope: "transit is the future". Beyond a very narrow corridor for a very narrow range of trips, that is simply not the case. Transit has severe limitations that make it a tool for very limited circumstances, as important as those limited circumstances may be."

Thursday, August 02, 2007

Houston's SXSW = a global Energy Technology Conference (ETC)

I was thinking last night about how cities carve out distinctive industry niches for themselves, like Silicon Valley and Austin in technology. It occurs to me that energy technology of all kinds is going to be a major world issue for some time to come, as global demand grows in the developing world, fossil fuels become harder to extract, and carbon and pollution concerns get addressed. There are all sorts of things going on, from biofuels to wind to solar to new approaches to traditional sources (like tar sands, oil shale, and coal-to-liquids). How can Houston put itself at the center of this new technology wave?

It's unrealistic to think all - or even most - of that research and those startups will be directly based here in a global economy connected by the internet. Geographic proximity is just not as critical as it was even a decade ago. But what we can certainly do is be the place the world gets together about energy by hosting an annual global mega-conference on energy technology.

The model I'm thinking about here is the South-by-Southwest (SXSW) mega-conference in Austin every year focused on music, movies, and interactive media. It grew from something pretty small to a true mega-event that gets national and even international coverage every year. We need a similar event, starting modestly but growing aggressively. One that brings together academic researchers, inventors, entrepreneurs, venture capitalists, policy makers, and the big energy companies (who can be researchers, innovators, and technology buyers themselves). It should be known as THE critical annual event for people who want to keep up with what's going on in the realm of energy technology.

Of course we already host a more narrowly focused event, the annual Offshore Technology Conference (OTC), which is quite large itself. This would be the broader Energy Technology Conference (ETC, instead of OTC), and it probably ought to be scheduled along with the OTC - either right before, after, or even together - to take advantage of all the energy talent that will already be in town for the OTC, especially international visitors. There would obviously be a lot of synergy between the two, and the OTC can help the ETC get instant critical mass.

Becoming a true "Silicon Valley for energy technology" may be a bit overambitious, but this kind of conference could go a long way to cementing our central role in this critical global industry. It's the kind of publicity you can't buy for our identity and brand, which, in turn, will attract more research, talent and capital locally. If you know people at the Greater Houston Partnership or the Convention and Visitors Bureau, be sure to pass this post along. Maybe they know the right people to get an event like this off the ground?...

About Me

Social Systems Architect and entrepreneur with a genuine love of my hometown. I cover a wide range of topics in this blog - including transportation, transit, economic development, quality-of-life, city identity, and development and land-use regulations - and have published numerous Houston Chronicle op-eds on these topics. I'm a Founding Senior Fellow with the Center for Opportunity Urbanism and co-authored the original study with noted urbanist Joel Kotkin and others, creating a city philosophy around upward social mobility for all citizens as an alternative to the popular smart growth, new urbanism, and creative class movements. I am a native Houstonian, 6th-generation Texan, attended Rice University for my BSEE and MBA, and a former McKinsey consultant and adjunct faculty member with Leadership Houston. I am currently the founder of Coached Schooling, pioneering a transformational new approach for a more effective and engaging 21st-century K-12 education combining the best elements of eLearning, home and traditional schooling. CONTACT EMAIL: tgattis (at) pdq.net - send me an email if you would like to receive these posts via email, or see the Google Groups signup box below.